Giving NAFTA Some Teeth

The eighth round of negotiations on the North American Free Trade Agreement (NAFTA) are expected to take place sometime next month. While progress has been made, the thorniest issues have yet to be addressed. One of the most contentious issues is dispute settlement. There are three main types, and all are controversial. The most fundamental dispute provision is Chapter 20, the Agreement’s state-to-state dispute settlement mechanism, which allows the government of any NAFTA country to file a complaint when it believes another government is violating the Agreement. The future of Chapter 20 is particularly uncertain. In October last year, the U.S. pushed a proposal that would make Chapter 20 “non-binding” by allowing parties to a dispute to ignore the findings of an independent body of jurists (referred to as a panel). This change would take Chapter 20 in the wrong direction, as it would make NAFTA less useful as an instrument to promote and enforce trade liberalization.

In a recent paper, my colleague Simon Lester and I examine the history of NAFTA Chapter 20, showing that the mechanism has not been used all that much. While there have been twenty-one disputes initiated since 1994, only three have gone to a panel and had decisions rendered. Strikingly, no panel has been composed since 2000. Why? We argue that NAFTA’s state-to-state dispute settlement chapter has a fundamental flaw in its provisions, which effectively allow the responding party to the dispute (the country being complained against) to block the formation of a panel.

In the late 1990s, Mexico initiated a dispute against the United States related to restrictions on sugar imports, and soon discovered the glitch in the system. Basically, in order for a panel to be composed, there has to be a list of individuals to choose from. This list, or roster, as it’s referred to, is supposed to be established by the parties when the agreement enters into force (to be updated over the years). However, a problem arises when there is no roster. In that situation, the responding party can block any of the complainant’s proposals for panelists. Thus, if one of the parties fails to appoint people to the roster, the panel process breaks down and the dispute settlement mechanism cannot function.

To find a remedy to this problem, we look at recent developments in state-to-state dispute settlement chapters in other trade agreements, notably, the Trans-Pacific Partnership (TPP) (now the recently signed CPTPP), the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), and the draft of the Japan-European Union Economic Partnership Agreement (JEEPA), which is still being negotiated. These modern trade agreements have all attempted to address the problem of lapsed rosters and panelists appointments, in their own way. Some have provisions that give the complaining party the authority to appoint panelists when the responding party refuses to cooperate, while others give this authority to an independent third party, or the co-chairs of a joint committee, who are high-ranking government officials of each party, and must arrive at a decision together.

We conclude that much of the problems with state-to-state dispute settlement in the NAFTA could have been resolved if the U.S. had stayed in the TPP, as that agreement, on the whole, appears to address the problem of panel composition. However, since there is no indication that the U.S. will rejoin the TPP anytime soon, we note some key principles that could help guide the NAFTA renegotiation of Chapter 20:

[T]he roster should not be a hurdle to appointing panelists; an independent third party can act as a facilitator in the panel appointments; and, without an independent third party, the complainant should have the power itself to appoint, in order to prevent the respondent from delaying panel formation (p. 15).

Ultimately, a functioning state-to-state dispute mechanism is an essential feature of any trade agreement, because if the obligations cannot be enforced, then the cost of noncompliance would be low. This undermines the impact of trade agreements, and is why making Chapter 20 non-binding would seriously weaken any benefits that can be accrued from a modernized NAFTA. We hope that the NAFTA negotiators take these considerations into account.